The Wingstop Bubble Is About to Pop

Amid the growth concerns in the U.S., the fast-food restaurant sector has been a standout performer over the last few months. Ever since the rise of Chipotle Mexican Grill (CMG), investors have always been on the hunt to find the next Chipotle. In doing so, the market tends to overvalue the stocks in the sector.

Despite the hyper-growth of several restaurants, it is impossible for several stocks to justify their sky-high valuation. I have already recommended shorting the likes of Shake Shack (SHAK). Although Shake Shack is a great company, the stock was overvalued when I recommended shorting it and has plunged over 10% since then.

However, in this article, I will focus on another bubble in the fast-food sector, that is, Wingstop (WING). Shares of Wingstop are up almost 25% this year and although the stock’s performance has been strong, I think its valuation is a bit stretched now, making it a good short candidate.

Slowing restaurant sales and overvaluation

Fast-food restaurant visits have grown at a quarterly rate of 2% since September of last year.
However, the Wall Street Journal recently reported that the metric didn't grow at all in the quarter ended in May.

According to the not-yet-published data from the NPD Group, fast-food represents about 80% of the entire restaurant industry and this slowdown is a red flag. Last week, Sonic Corp’s (SONC) CEO Clifford Hudson said the consumers have become "more guarded," and are more price-sensitive than a few months ago.

If this is the beginning of the slowdown of the entire restaurant industry, then things don’t look good for Wingstop going forward. Currently, Wingstop is trading at 65 times trailing earnings and has a Price-to-Sales ratio of almost 10!

Clearly, the stock is overvalued, even for a growth stock. But, with the fast-food segment apparently witnessing a slowdown in traffic, it is quite possible that Wingstop will struggle to justify its valuation in the near term.

While the P-E and P-S ratios may not be the best tools when gauging a growth stock, these metrics are very important in Wingstop’s case. Why? Primarily because Wingstop’s growth targets do not justify its valuation. Not by a long shot.

Given Wingstop’s valuation, the company should be reporting 30%+ annual revenue growth for at least two to three years. However, according to Yahoo! Finance, Wingstop’s sales are expected to grow just by 14.3% this year, and 15.7% next year.

There’s no way Wingstop should command such a high valuation with those growth estimates. I think the stock is currently in a bubble phase which is about to pop. As a result, I think investors should short Wingstop
Published on Jun 28, 2016
By Ayush Singh

Copyrighted 2020. Content published with author's permission.

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